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BI Holds Rate Steady on Rising Inflation Outlook
Dion Bisara | January 12, 2012

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Bank Indonesia kept its benchmark interest rate at 6 percent for a second month in January, reflecting its stance on a possible acceleration in inflation this year.

The central bank refrained on Thursday from changing its overnight policy rate after it cut the rate by a total of 75 basis points in November and October. Its decision was predicted by 13 of 18 economists, according to a Bloomberg News survey, while the remainder expected a 25 basis point cut.

Inflation slowed to 3.79 percent in December, easing for a fourth straight month to its lowest since March 2010.

The government will begin banning private cars from using subsidized fuel a few months from now because it wants to reduce costs from the fuel subsidy and it needs to prevent the budget deficit from widening. The ban will start in Jakarta in April before spreading to other provinces and cities in Java such as Surabaya in May.

Analysts and economists in Jakarta say that banning Premium fuel would be equivalent to raising the subsidized fuel price. Private-car users would have to use higher-octane fuel such as Pertamax, they say.

“Bank Indonesia sees inflationary pressure increasing this year from the impact of banning subsidized fuel,’’ the central bank’s governor, Darmin Nasution, said on Thursday

“Still, inflation this year and in 2013 will remain under control at 4.5 percent plus or minus one percentage point.”

Darmin, who was the country’s tax chief until May 2010, said the central bank would use a combination of various monetary instruments, such as reserve requirements and minimum capital requirements, to contain inflation this year.

Bank Indonesia maintained its forecast on economic growth at 6.3 percent this year from an estimated 6.5 percent last year, with household spending expected to help counter weakness in the global economy. Private consumption typically accounts for around 60 percent of Indonesia’s gross domestic product.

“Bank Indonesia remains confident that domestic consumption will continue to cushion the downside risks from the slower global growth and to lend support for growth,” said Enrico Tanuwidjaya, an economist at Malaysia’s Maybank in Singapore.

Gundy Cahyadi, an economist at OCBC in Singapore, was less bullish on Indonesia’s growth. He said 6.3 percent to 6.7 percent growth for this year seemed a bit ambitious given current conditions in the global economy.

Gundy cut his economic growth forecast for Indonesia to 5.3 percent this year.

“We continue to expect BI to keep its rate unchanged at 6.00 percent,” he wrote in a note to clients on Thursday.

The rupiah rose as much as 0.5 percent to 9,153 against the dollar on Thursday before the central bank’s decision, according to Bloomberg. It closed at 9,210, down from 9,200 on Wednesday.

Bank Indonesia may not be alone in keeping its rate the same in a bid to maintain growth. The Bank of Korea may keep its benchmark unchanged at 3.25 percent on Friday, and Sri Lanka’s central bank held borrowing costs for a 12th month on Wednesday, according to Bloomberg.